How High Can Barnes & Noble Fly?

Shares of Barnes & Noble (NYS: BKS) hit a 52-week high yesterday. Let's look at how it got here and whether clear skies are ahead.

How it got hereThe last major retail bookselling chain is keenly aware of its need to push into digital media and has been working to transform itself in recent times. The $204 million investment it scored last year from Liberty Media (NAS: LMCA) will help on that front, bringing Liberty's expertise in digital content distribution to the table.

The company kicked off the new year by toying with the idea of spinning off its Nook business while also lowering its full-year guidance, sending shares down by as much as 31% to the 52-week low of $9.35 on that day.

A month later, B&N reported third-quarter earnings that mostly told the same old story: Nook and digital sales are exploding while losing money as B&N dumps the profit from no-growth retail segments into investing in the digital side.

Yesterday, B&N and Microsoft (NAS: MSFT) announced that the software giant was investing $300 million in a new subsidiary geared toward accelerating the transition to e-reading. The new subsidiary will combine the digital and college businesses and is valued at $1.7 billion. Compare that to B&N's market cap before the announcement of $823 million, and you can see why shares nearly doubled overnight on the news to a fresh 52-week high of $26 -- nearly three times the low four months ago.

How it stacks upB&N's most important competitors are Amazon.com (NAS: AMZN) and Apple (NAS: AAPL) , let's see how they compare.

Amazon and Apple are the two behemoths in the e-book industry, which go hand in hand with their tablet offerings. Barnes & Noble keeps chugging along with its own e-book initiatives, while the Nook is targeting an entirely different market than the iPad. Apple also happens to be in hot water with the feds over its disruption of e-book pricing.

What's next?The Microsoft partnership could benefit B&N by expanding its reach into Microsoft's Windows 8 platform, although this could also end up cannibalizing Nook hardware sales. The deal also settles the patent litigation between the pair, as the subsidiary will have a royalty-bearing license for Microsoft's patents.

Stay tuned for more from B&N on the logistics of the split, which may or may not result in the spinoff of a separate public company.

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